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IHT > SEC Filings for IHT > Form 10-Q on 15-Dec-2011All Recent SEC Filings

Show all filings for INNSUITES HOSPITALITY TRUST

Form 10-Q for INNSUITES HOSPITALITY TRUST


15-Dec-2011

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

The following discussion should be read in conjunction with our unaudited consolidated financial statements and notes thereto appearing elsewhere in this Form 10-Q.

We own the sole general partner's interest in the Partnership. Our principal source of cash flows is from the operations of the Hotels and management and licensing contracts with affiliated and third-party hotels.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

In our Annual Report on Form 10-K for the year ended January 31, 2011, we identified the critical accounting policies that affect our more significant estimates and assumptions used in preparing our consolidated financial statements. We believe that the policies we follow for the valuation of our hotel properties, which constitute the majority of our assets, are our most critical policies. Those policies include methods used to recognize and measure any identified impairment of our hotel properties assets. There have been no material changes to our critical accounting policies since January 31, 2011.

LIQUIDITY AND CAPITAL RESOURCES

Our principal source of cash to meet our cash requirements, including distributions to our shareholders, is our share of the Partnership's cash flow, our direct ownership of the Yuma, Arizona property and our management and licensing contracts. The Partnership's principal source of revenue is hotel operations for the four hotel properties in which it owns interests. Our liquidity, including our ability to make distributions to our shareholders, will depend upon our ability and the Partnership's ability to generate sufficient cash flow from hotel operations.

Hotel operations are significantly affected by occupancy and room rates. Occupancy increased from the first nine months of fiscal year 2011 to the nine months of fiscal year 2012, while rates decreased. Results are also significantly impacted by overall economic conditions and conditions in the travel industry. Unfavorable changes in these factors could negatively impact hotel room demand and pricing, which would reduce our profit margins on rented suites.

The Trust has principal of $7.6 million due and payable for the remainder of fiscal year 2012 under mortgage notes payable, including the amount due upon the Ontario mortgage's maturity. For the period between November 1, 2011 and October 31, 2012, the Trust has principal of $8.1 million due and payable under mortgage notes payable.

The non-recourse mortgage note payable relating to our Ontario, California property, which is secured by the property and the rents, revenues and profits from the property, matured on May 11, 2011, at which time a final principal payment of approximately $7.5 million was due. The lender under the note currently has the option to declare the note due and payable in full. We have been in discussion with the lender over the last six to nine months regarding the modification, restructure and/or extension of this single asset non-recourse hotel loan. We did not make the October or November 2011 payments on the monthly principal and interest since we are awaiting a response from the lender. The note includes default interest of five percent above the interest rate in effect under the note. For the three months ended October 31, 2011, accrued late fees were $14,228. To date, the lender in our negotiations has not required us to pay any additional default interest or penalties. In the event we are unable to reach an agreement with the lender, we will explore alternative solutions including, but not limited to, alternative sources of financing.

In past years, we have relied on cash flows from operations to meet financial obligations as they come due. However, for the remainder of fiscal year 2012 (November 1, 2011 through January 31, 2012), our management has projected that cash flows from operations alone may not be sufficient to meet all of our financial obligations as they come due.

In the event cash flows from operations are insufficient to satisfy these obligations as they become due, we may seek to refinance properties, negotiate additional credit facilities or issue debt instruments.

We anticipate that current cash balances, future cash flows from operations, proceeds from sales of non-controlling interests in the Tucson Foothills subsidiary, and available credit, collectively, will be sufficient to satisfy our obligations as they become due, assuming the extension or refinancing of the Ontario mortgage note.


On November 23, 2010, the Trust established a revolving bank line of credit, with a credit limit of $500,000. The line of credit bears interest at the prime rate plus 1.0% per annum with a 6.0% rate floor and has no financial covenants. The line matured on May 23, 2011 and was extended to May 23, 2012. The line is secured by a junior security interest in the Yuma, Arizona property and by the Trust's trade receivables. Mr. Wirth is a guarantor on the line of credit. There were $8 drawn from the line of credit as of October 31, 2011, and no funds were drawn under the line of credit as of January 31, 2011.

We may seek to negotiate additional credit facilities or issue debt instruments. Any debt incurred or issued by us may be secured or unsecured, long-term, medium-term or short-term, bear interest at a fixed or variable rate and be subject to such other terms as we consider prudent.

We continue to contribute to a Capital Expenditures Fund (the "Fund") an amount equal to 4% of the Hotels' room revenues. The Fund is restricted by the mortgage lender for four of our properties. As of October 31, 2011, $84,695 was held in restricted capital expenditure funds and is included on our Balance Sheet as "Restricted Cash." The Fund is intended to be used for capital improvements to the Hotels and for refurbishment and replacement of furniture, fixtures and equipment, in addition to other uses of amounts in the Fund considered appropriate from time to time. During the nine months ended October 31, 2011, the Hotels spent $620,205 for capital expenditures. We consider the majority of these improvements to be revenue producing. Therefore, these amounts have been capitalized and are being depreciated over their estimated useful lives. The Hotels also spent $1.1 million and $884,000 during the nine-month periods ended October 31, 2011 and 2010, respectively, on repairs and maintenance. These amounts have been charged to expense as incurred.

As of October 31, 2011, we have no commitments for capital expenditures beyond the 4% reserve for refurbishment and replacements set aside annually for each hotel property.

The Tucson and Albuquerque entities are required to use its best efforts to pay the priority distributions referenced in notes 6 and 7. The Trust does not guarantee or is not otherwise obligated to pay the cumulative priority distributions.

COMPLIANCE WITH CONTINUED LISTING STANDARDS OF NYSE AMEX

On September 30, 2010, the Trust received a letter from the NYSE Amex LLC (the "NYSE Amex") informing the Trust that the staff of the NYSE Amex's Corporate Compliance Department has determined that the Trust is not in compliance with
Section 1003(a)(ii) of the NYSE Amex Company Guide due to the Trust having stockholders' equity of less than $4.0 million.

The NYSE Amex's letter informed the Trust that, to maintain its listing, it was required to submit a plan of compliance by November 1, 2010, addressing how it intended to regain compliance with the NYSE Amex's continued listing standards within a maximum of 18 months. The NYSE Amex's letter provided that if the plan submitted by the Trust were accepted by the NYSE Amex, the Trust would likely be able to continue its listing during the 18-month plan period, during which time it would be subject to periodic review to determine whether it was making progress consistent with the Trust's plan.

The Trust submitted its plan on November 1, 2010. The plan includes expected improvement in hotel operating profits as the economy and hospitality industry continue to recover, the sale of membership interests in the Albuquerque entity above carrying value, and the potential sale of membership interests in other hotel properties owned by the Trust and Partnership above carrying value. (The sale of membership units in the Tucson Foothills entity began in April and continues into the fiscal fourth quarter.) The Trust expects to regain compliance within the 18-month plan period.

RESULTS OF OPERATIONS

Our expenses consist primarily of hotel operating expenses, property taxes, insurance, corporate overhead, interest on mortgage debt, professional fees and depreciation of the Hotels. Our operating performance is principally related to the performance of the Hotels. Therefore, management believes that a review of the historical performance of the operations of the Hotels, particularly with respect to occupancy, calculated as rooms sold divided by the number of rooms available, average daily rate ("ADR"), calculated as total room revenue divided by number of rooms sold, and revenue per available room ("REVPAR"), calculated as total room revenue divided by the number of rooms available, is appropriate for understanding revenue from the Hotels. Occupancy was 61.76% for the nine months ended October 31, 2011, an increase of 7.2% from the prior year same period. ADR decreased $0.57, or 0.80%, to $70.84. The moderate decrease in ADR and increased occupancy resulted in an increase of $4.84, or 12.45%, in REVPAR to $43.75 from $38.90 in the prior year period. We believe the increase in occupancy is due to the moderately improving trend in our economy, which caused more vacation and business travelers.

The following table shows occupancy, ADR and REVPAR for the periods indicated:

FOR THE NINE MONTHS ENDED
                                             October 31,
                                         2011            2010

OCCUPANCY                                    61.76 %        54.48 %
AVERAGE DAILY RATE (ADR)               $     70.84       $  71.41
REVENUE PER AVAILABLE ROOM (REVPAR)    $     43.75       $  38.90

No assurance can be given that the trends reflected in this data will be maintained or improve or that occupancy, ADR or REVPAR will not decrease as a result of changes in national or local economic or hospitality industry conditions. We expect the improving economic conditions to positively affect our business levels for the remainder of this current fiscal year.


RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED OCTOBER 31, 2011 COMPARED TO THE
NINE MONTHS ENDED OCTOBER 31, 2010

A summary of the operating results for the nine months ended October 31, 2011
and 2010 is:

                                2011           2010          Change      % Change
Revenue                     $ 12,680,144   $ 11,753,867    $   926,277        7.9 %
Operating Income (Loss)     $     44,703   $   (670,144 )  $   714,848     >100.0 %
Total Expenses              $ 13,792,433   $ 13,616,576    $   175,857        1.3 %
Net Loss Attributable to
Controlling Interest        $   (834,194 ) $ (1,363,030 )  $   528,836       38.8 %
 Net Loss Per Share -
Basic                       $      (0.10 ) $      (0.16 )  $      0.06       37.5 %

For the nine months ended October 31, 2011, our total revenue was $12.7 million, an increase of $926,000, or 7.9%, compared with the prior year period total of $11.8 million. Revenues from hotel operations, which include Room, Food and Beverage, Telecommunications and Other revenues, increased 11.7% to $10.9 million for the nine months ended October 31, 2011, from $9.7 million for the nine months ended October 31, 2010. Hotel room revenue increased 12.5% while Food and Beverage operations experienced an increase of 3.0%, primarily due to higher occupancy as a result of what we believe are improving economic conditions.

Total expenses were $13.8 million for the nine months ended October 31, 2011, an increase of $176,000, or 1.3%, from the prior year period total of $13.6 million. Total operating expenses of $12.6 million for the nine months ended October 31, 2011, an increase of $211,000, or 1.7%, from the prior year period total of $12.4 million. The majority of the hotel operating expenses increased due to higher occupancy.

General and administrative expense increased $67,000, or 3.1%, to $2.24 million for the nine months ended October 31, 2011 from $2.18 million for the prior year period. The increase was primarily due to increased occupancy.

Repairs and maintenance expense was $1.1 million for the nine months ended October 31, 2011, an increase of $218,000, or 24.7%, over the prior year period total of $884,000. The increase was primarily due to higher maintenance labor and operating expenses at the Yuma and Tucson St. Mary's, Arizona locations due to significant maintenance projects at the property.

Total interest expense was $1.2 million for the nine months ended October 31, 2011 and was consistent with the prior year period.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED OCTOBER 31, 2011 COMPARED TO
THE THREE MONTHS ENDED OCTOBER 31, 2010

A summary of the operating results for the three months ended October 31, 2011
and 2010 is:

                                2011            2010           Change      % Change
Revenue                     $   3,645,922   $   3,334,645    $   311,277        9.3 %
Operating Loss              $    (292,359 ) $    (493,386 )  $   201,027       40.7 %
Total Expenses              $   4,323,818   $   4,228,636    $    95,182        2.3 %
Net Loss Attributable to
Controlling Interest        $    (525,314 ) $    (674,822 )  $   149,508       22.2 %
Net Loss Per Share -
Basic                       $       (0.06 ) $       (0.08 )  $      0.02       25.0 %


For the three months ended October 31, 2011, our total revenue was $3.6 million, an increase of $311,000, or 9.3%, compared with the prior year period total of $3.3 million. Revenues from hotel operations, which include Room, Food and Beverage, Telecommunications and Other revenues, increased 8.5% to $3.1 million for the three months ended October 31, 2011, from $2.8 million for the three months ended October 31, 2010, due to increased occupancy at the Yuma hotel.

Total expenses were $4.3 million for the three months ended October 31, 2011, an increase of $95,000, or 2.3%, from the prior year period total of $4.2 million. Total operating expenses of $3.9 million for the three months ended October 31, 2011 increased $110,000 or 2.9% from the prior year of $3.8 million. Due to better cost control, operating expenses did not increase proportionately with revenue with the higher occupancy.

General and administrative expense was $637,000 for the three months ended October 31, 2011, a decrease of $27,000, or 4.1%, from the prior year total of $664,000.

Repairs and maintenance expense was $313,000 for the three months ended October 31, 2011, an increase of $54,000, or 20.8%, over the prior year period total of $259,000. The increase was primarily due to higher maintenance labor and operating expenses at the Yuma and Tucson St Mary's, Arizona locations due to significant maintenance projects at the properties.

Total interest expense of $386,000 for the three months ended October 31, 2011 and was consistent with the prior year period.

FUNDS FROM OPERATIONS (FFO)

We recognize that industry analysts and investors use Funds From Operations ("FFO") as a financial measure to evaluate and compare equity REITs. We also believe it is meaningful as an indicator of net income, excluding most non-cash items, and provides information about our cash available for distributions, debt service and capital expenditures. We follow the March 1995 interpretation of the National Association of Real Estate Investment Trusts ("NAREIT") definition of FFO, as amended January 1, 2000, which is calculated (in our case) as net income or loss (computed in accordance with GAAP), excluding gains (or losses) from sales of property, depreciation and amortization on real estate property and extraordinary items. FFO does not represent cash flows from operating activities in accordance with GAAP and is not indicative of cash available to fund all of our cash needs. FFO should not be considered as an alternative to net income or any other GAAP measure as an indicator of performance and should not be considered as an alternative to cash flows as a measure of liquidity. In addition, our FFO may not be comparable to other companies' FFO due to differing methods of calculating FFO and varying interpretations of the NAREIT definition. The following tables show the reconciliation of FFO to Net Loss Attributable to Shares of Beneficial Interest:

                       For the Nine Months Ended        For the Three Months Ended
                              October 31,                      October 31,
                         2011             2010             2011            2010
Net Loss             $  (834,194)    $  (1,363,030)    $  (525,314)    $  (674,822)
Attributable to
Controlling Interest
Hotel Property          1,308,764         1,400,263         422,214         465,025
Depreciation
Loss on Disposition            63               675               -             225
of Assets
Non-Controlling         (339,070)         (307,468)       (109,888)       (101,826)
Interest Share of
Depreciation and
Loss on Dispositions
Funds from           $    135,563    $    (269,560)    $  (212,988)    $  (311,398)
Operations

FFO increased approximately $405,000 for the nine-month period ended October 31, 2011, when compared to the nine-month period ended October 31, 2010. Comparing the three-month periods ended October 31, 2011 and 2010, FFO shows improvement of approximately $98,000. The increase was primarily due to lower operating expenses relative to revenues, especially an increase in revenues at the Yuma, Arizona property, where we finished significant upgrade projects which resulted in new rooms coming online during the first quarter.

EARNINGS BEFORE INTEREST TAX DEPRECIATION AND AMORTIZATION (EBITDA)

The Trust reported earnings before minority interest, interest, taxes, depreciation and amortization (Adjusted EBITDA) of $1.4 million for the nine months ended October 31, 2011, as compared to $730,000 in the prior year period, an increase of $613,000, or 84%. Adjusted EBITDA was $130,000 for the three months ended October 31, 2011, as compared to $(28,000) in the prior year period, an improvement of $101,000. Adjusted EBITDA is a non-GAAP financial measure that management believes provides meaningful insight into the Trust's financial performance and its operating profitability before non-operating expenses (such as interest and "other" non-core expenses) and non-cash charges (depreciation and amortization).

A reconciliation of adjusted EBITDA to net loss attributable to Shareholders of Beneficial Interest for the nine and three months ended October 31, 2011 follows:

                                              For the Nine Months Ended          For the Three Months Ended
                                                     October 31,                         October 31,
                                               2011               2010             2011              2010
Net loss attributable to controlling
interest                                   $   (834,194 )     $  (1,363,030 )   $  (525,314 )     $  (674,822 )
Add back:
 Depreciation                                 1,308,764           1,400,263         422,214           465,025
 Interest expense                             1,156,992           1,192,565         385,538           400,605
 Net loss attributable to
Non-controlling interest                       (276,391 )          (498,390 )      (151,439 )        (219,113 )
Less:
 Interest income                                  1,704               1,289           1,144                56
ADJUSTED EBITDA                            $  1,353,467       $     730,119     $   129,855       $   (28,361 )


OFF-BALANCE SHEET FINANCINGS AND LIABILITIES

Other than lease commitments and legal contingencies incurred in the normal course of business, we do not have any off-balance sheet financing arrangements or liabilities. We do not have any majority-owned subsidiaries that are not included in the consolidated financial statements. (See Note 2 - "Summary of Significant Accounting Policies.")

SEASONALITY

The Hotels' operations historically have been seasonal. The three southern Arizona hotels experience their highest occupancy in the first fiscal quarter and, to a lesser extent, the fourth fiscal quarter. The second fiscal quarter tends to be the lowest period of occupancy at those three southern Arizona hotels. This seasonality pattern can be expected to cause fluctuations in our quarterly revenue. The two hotels located in California and New Mexico historically experience their most profitable periods during the second and third fiscal quarters (the summer season), providing some balance to the general seasonality of our hotel business. To the extent that cash flows from operations are insufficient during any quarter, because of temporary or seasonal fluctuations in revenue, we may utilize cash on hand or borrowings to make distributions to our shareholders or to meet operating needs. No assurance can be given that we will make distributions in the future.

FORWARD-LOOKING STATEMENTS

Certain statements in this Form 10-Q, including statements containing the phrases "believes," "intends," "expects," "anticipates," "predicts," "will be," "should be," "looking ahead," "may" or similar words, constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We intend that such forward-looking statements be subject to the safe harbors created by such Acts. These forward-looking statements include statements regarding our intent, belief or current expectations in respect of (i) the declaration or payment of dividends; (ii) the leasing, management or operation of the Hotels;
(iii) the adequacy of reserves for renovation and refurbishment; (iv) our financing plans; (v) our position regarding investments, acquisitions, developments, financings, and other matters; and (vi) trends affecting our or any Hotel's financial condition or results of operations.

These forward-looking statements reflect our current views in respect of future events and financial performance, but are subject to many uncertainties and factors relating to the operations and business environment of the Hotels that may cause our actual results to differ materially from any future results expressed or implied by such forward-looking statements. Examples of such uncertainties include, but are not limited to:

• local or national economic and business conditions, including, without limitation, conditions which may affect public securities markets generally, the hospitality industry or the markets in which we operate or will operate;

• fluctuations in hotel occupancy rates;

• changes in room rental rates that may be charged by InnSuites Hotels in response to market rental rate changes or otherwise;

• seasonality of our business;

• interest rate fluctuations;

• changes in government regulations, including federal income tax laws and regulations;

• competition;

• any changes in our financial condition or operating results due to acquisitions or dispositions of hotel properties;

• insufficient resources to pursue our current strategy;

• concentration of our investments in the InnSuites Hotelsฎ brand;

• loss of franchise contracts;

• real estate and hospitality market conditions;

• hospitality industry factors;

• our ability to meet present and future debt service obligations;

• our inability to refinance or extend the maturity of indebtedness at, prior to or after the time it matures;

• terrorist attacks or other acts of war;

• outbreaks of communicable diseases;

• natural disasters; and

• loss of key personnel.

We do not undertake any obligation to update publicly or revise any forward-looking statements whether as a result of new information, future events or otherwise. Pursuant to Section 21E(b)(2)(E) of the Securities Exchange Act of 1934, the qualifications set forth hereinabove are inapplicable to any forward-looking statements in this Form 10-Q relating to the operations of the Partnership.


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